Google’s (NASDAQ:GOOG) YouTube video content library is one of the biggest on the Internet. According to Trefis estimates, Google made over $2.8 billion in display revenues in 2012. However, we think that the search giant is aiming to capture a bigger share of the online video advertising market, which is slated to reach $9 billion in the U.S. by 2017. [1] In the first part of this article, we will discuss the trend in online videos industry. In the second part, we will explore how YouTube can bolster Google’s display ads dollars.

On the supply side, user generated video content is on the rise due to a number of factors including the proliferation of low cost but high quality video equipment, the increase in Internet penetration and bandwidth, and the low storage costs of online content. Additionally, premium video content is also growing because many traditional media companies are boosting their online presence to capture a shift of viewers moving online for streaming digital content.

On the demand side, online video content is becoming increasingly popular due to broader Internet access and the advent of smart connected devices (which include tablets, smart phones and notebook PCs). Many users, especially in developing countries, are accessing Internet for the first time through these devices. According to Adobe, mobile video views jumped 300% in 2012. [2] Moreover, Ooyala estimates that mobile devices accounted for more than 10% of online video consumption in Q1 2013. [3] We believe that the penetration of mobile devices will lead to huge growth in online video consumption in the future.

As online video content empowers users to dictate what, when and over which medium to watch the content, viewers are spending more time viewing videos online rather than on traditional TV. We expect these trends will continue to drive demand and supply for online video content in the future.

Trends Supporting Online Video Ads Spending

The change in consumer behavior is prompting the migration of TV ad budgets to online spending. While TV ad spending is expected to exceed $75 billion by 2017, video online ad spending is expected to exceed $9 billion by 2017, according to eMarketer. [1] Additionally, digital video ad spend is increasing at a faster pace and much of this growth is coming from mobile devices. According to eMarketer, mobile ads share in online video ad spending is expected to increase from 12.6% in 2012 to over 29% by 2017.

eMarketer expects digital video spending to reach around one-eighth of what is spent on television ads by 2017. According to Interactive Advertising Bureau, 70% of video ads buyers said that they would likely move TV dollars to digital video in the coming year. [4] These advertisers believe that shifting TV ad budget to digital increases the reach and effectiveness of their ad campaigns. [5]

However, online video ads cost per impression (CPM) still lags TV CPM. While a Turns study estimates that cost per impression (eCPM) for online video is in the $8-$12 range, [6] TVB estimates this at $25 for TV. [7] We expect TV and digital video advertising spend to converge as multi-platform and multi-screen video advertising get integrated.

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